I'm not self employed, why do you need my tax returns for a mortgage?

By
Real Estate Mortgage Broker with Amerifirst Financial, Inc.

A question that comes up quite often by potential borrowers is "I'm not self employed, why do you need my tax returns for a mortgage?" Now this may seem like a silly question to seasoned real estate and mortgage veterans. But the average home buyer may not realize what mortgage lenders look for when reviewing and analyzing tax returns. 

tax return

We all know that self employed borrowers must submit tax returns when applying for a loan as that is the best and most accepted method for verifying their income. But there are many other reasons why lenders and more importantly underwriters require tax returns to be reviewed.

Even if you are a salaried W-2 employee, there are things that may show up on a tax return that could impact your qualifying income. For instance:

  • Unreimbursed business expenses such as union dues, required uniforms, mileage, etc. are all examples of things that the employee must pay and is not reimbursed by their employer. Many times 100% commission employees such as loan officers will write off all their unreimbursed expenses which will decrease their qualifying income.
  • Rental properties or 2nd homes. Lenders must determine if borrowers own rental properties or other real estate and whether or not those properties have positive or negative cash flow. Some borrowers don't disclose rentals on their application if they don't owe anything on it and they don't need the rental income to qualify. But the lender wants to know any and all real estate owned by a borrower.
  • Capital Gains or Losses. If there are on-going gains or losses this could positively or negatively impact a borrower's income.
  • To verify other sources of income such as interest/dividend, alimony or retirement income.
  • Ensure no self employment when none was disclosed. Again, some borrowers may run a side business or be involved in a partnership in addition to their full time job. The borrower may think this is insignificant as there is not much income being declared, if any, but this business may be a way for the borrower to write off some expenses and therefore lower their taxable income. This is great for lowering taxable income and reducing federal and state taxes but it could also lower qualifying income for the loan.
  • Alimony paid. A borrower may fail to report that they pay alimony but it may show up on their tax return as a way to lower their taxable income.

These are just some reasons why lenders need to review borrowers' tax returns. So the next time you're asked why does my lender need my tax returns, you'll be able to provide your buyer with a good answer.

 

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Re-Bloggged 3 times:

Re-Blogged By Re-Blogged At
  1. Markita Woods NMLS#190699 01/22/2011 10:32 AM
  2. Kevin Kelly 01/22/2011 07:31 PM
  3. Devona Garrigus 01/23/2011 09:52 PM
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tax returns
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Rainer
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Jacquie Cliff
- Real Estate and Short Sale Expert
Champions Real Estate Services - Lynnwood, WA

This is definitely a reaction to the bubble popping.  I wonder how many loans got done on fake W-2s?

January 22, 2011 04:15 PM
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Gary Woltal
Assoc. Broker Realtor SFR Dallas Ft. Worth
Keller Williams Realty

Joe, I completely understand the statement and the INVASION OF PRIVACY now by the mortgage lenders. Obviously in the past there was no need for W-2 employees to fork over 1040's. Times change. People STILL balk with the reasons.

January 22, 2011 05:24 PM
Rainmaker
172,050
Laura Forman
Your Brevard Premier Property Specialist
National Realty of Brevard www.LauraSellsBrevard.com

Thanks for the post - I learned something new.

January 22, 2011 06:02 PM
Anonymous #30
Anonymous
Anonymous

Great post Joe!  Very detailed an important information. 

Definitely worthy of a re-blog.  Congrats on the feature!

 

All the best!

January 22, 2011 07:30 PM
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Jeff Belonger
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans
Social Media - Infinity Home Mortgage Company, Inc

Joe.. money was given to easily and freely in the past... In the early to late 90's, tax returns were usually asked for anyhow... we got away from that and now it's a requirement in many cases. I know home buyers don't like this... but do you think us loan officers like getting more paper work again? lol Not me... good post with some good reasons.

jeff belonger

January 22, 2011 09:29 PM
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Joe Reed

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